Wednesday, November 30, 2011

Tweets are about to take their place alongside other economic indicators as a way influencing the Reserve Bank.

Not Australia’s Reserve Bank, at least not yet. The Federal Reserve Bank of New York is putting up money for firms to provide a “sentiment analysis and social media monitoring solution” that will allow it to read the mood of the economy through Twitter, Facebook, Youtube, and blogs.

Playing around with a basic free version of the software has convinced me they’re on to something. Before Tuesday’s financial statement tweets about Wayne Swan were twice as negative as they were positive. (I should acknowledge that the machine has a problem with sarcasm. When a Twitter comment thanked Wayne Swan for clearly explaining that ALP policy was no good, the machine scored it as a compliment). After the midday statement the comments become more negative still.

Whether or not the balance of Twitter comments accurately reflects the public mood, changes in the balance of comments probably do reflect changes in the public mood. And the number of comments available is massive.

Australia’s Reserve Bank already makes use of the Melbourne Institute consumer sentiment index, compiled each month by asking just 1200 people how they feel about the economy and their personal finances.

How much better would it be to aggregate in real time one hundred times as many responses, each given freely in moments of frustration or elation where the words used and the frequency with which they are used convey not just the numerical balance of optimists and pessimists but also the intensity of emotions.

Statisticians have a rule, the more observations the better... James Surowiecki takes it to its logical conclusion in his book The Wisdom of Crowds: When the number of observations gets very big and is aggregated it tends to be more accurate than any individual observation, even those of experts.

He says one of the early successes in harnessing the wisdom of crowds came in locating the missing US submarine Scorpion in May 1968. It could have been sunk anywhere in a region 32 kilometres wide.

Instead of asking one or two experts to describe where they thought it was, the chief naval officer assembled a very large group of specialists in all sorts of fields and asked each to guess the location. The prize was a bottle of Scotch.

Aggregating the guesses he came up with a spot just metres from where the submarine was found. It was a location none of the individual experts had come up with.

The outcomes of Twitter sentiment ratings are hard to rig. Right now the ratings for Qantas are running two to one against (about the same as for Wayne Swan before the yesterday’s statement made things worse).

A week ago Qantas attempted to re-engineer the balance by offering a gift pack “including the famous Qantas pajamas” as a prize for tweets that included the hashtag #QantasLuxury and described a good Qantas experience. (“Be creative!”, it added in parentheses.)

The responses were indeed creative, and a good deal more representative of the public mood than the airline had hoped.

“#QantasLuxury is a plane that actually flies,” said one. “#QantasLuxury is chartering a Greyhound bus and arriving at your destination days before your grounded flight,” said another. “#Virginluxury: Getting an exit row, #Tigerluxury: Getting a biscuit, #Qantasluxury: getting a pilot, a plane, engineers and baggage handlers, said one of my favourites.

Some 16,000 tweets followed. An analysis by the social media firm iGo2 found many of them were from the US and Europe where Qantas had stranded passengers.

The airline had created a buzz alright, but it had tapped into rather than altered the balance of feelings.

Southern Cross Austereo boasts on its website it can “connect brands with 95 per cent of Australians”. In the same week Qantas blew itself up on Twitter Southern Cross was humbled when the Australians it connects with used Twitter to connect with it and with its advertisers.

Its Sydney FM radio star Kyle Sandilands had had a less than impressive TV show debut on the Monday night. Angry at reaction the next morning he lashed out at a “fat slag” on a newspaper site who had labelled it a disaster.

“What a fat bitter thing you are. You’ve got a nothing job anyway. You are a piece of shit. Your hair is very nineties, and your blouse. You haven’t got that much titty to be having that low-cut blouse. Watch your mouth or I’ll hunt you down,” and so on.

ABC radio journalist Mark Colvin heard the outburst, tweeted about it, the Mumbrella website copied the audio and posted it on its own site before Southern Cross could remove it and thousands of tweets directly implored sponsors to remove their ads.

One by one Holden, Ford, Lexus, Telstra, American Express, Blackberry, Olympus, Beaurepaires, CUA financial services, Harvey Norman, Coles, Toys R Us and Fantastic Furniture withdrew their ads. Some removed their ads not just from the Kyle Sandilands show but from the entire network.

One advertising agency fired its client after it refused to remove its ads. “We have decided to disassociate ourselves from this client after a disagreement in regards to what we believe to be an appropriate response,” said the Girl PR agency in statement. The client, Goldmark Jewellers, then withdrew its ads anyway.

What is powerful invites manipulation. But the geeks are on that possibility. Fake comments, posted by so-called “sockpuppets” read differently to real ones.

Researchers at Cornell University say they have developed software they say can detect fake hotel reviews 90 per cent of the time. Humans can detect fake reviews only half the time. Apparently fake reviews use more verbs, real ones more punctuation. Amazon is trialing the technology.

Twitter may not be a prefect tool for assessing the mood of the times, but it is shaping up to be better than any we have ever had before. It’s not just the Reserve Bank. Everyone should be taking its pulse.

The economic forecasts in the economic statement are real enough - they are almost exactly in line those of those released this month by the Organisation for Economic Co-operation and Development and the Reserve Bank. Employment will grow by a diminished 287,000 over the next two years rather than the 500,000 forecast in the budget. That’s barely enough to match the increased population that will be looking for work. By June 2013 the unemployment rate will be 5.5 per cent rather than the 4.5 per cent forecast in the budget. The four-year tax revenue forecast is down $20 billion on the budget time guess, and that’s if all goes well.

Both the OECD and the government’s forecasts assume developed nations “muddle through” - that that “sovereign debt and banking sector problems in the euro area can be somehow contained and that excessive fiscal tightening will be avoided in the United States”. If that doesn’t happen, if the mix of prices Australia uses to trade with the rest of the world slip 4 per cent more than forecast, Treasury talks of a further hit to the budget of $2.5 billion this financial year and $6.6 billion in 2012-13, enough to wipe out the prized 2012-13 $1.5 billion surplus four times over.

Wherever they have had discretion Swan and Wong have moved spending out of the surplus target year and moved savings into it... The official table shows extra spending of $2.3 billion in 2011-12, 589 million in 2013-14 and 827 million in 2012-15. Fair enough, but in 2012-13 there’s a cut in spending of $1 billion. Spot the odd year out. Almost all of that cut is spending moved forward into 2011-12, much of it for flood reconstruction. Swan insisted yesterday the changed spending profile was not related to his search for a 2012-13 surplus, the spending just happened to be needed now.

The extra 2.5 per cent efficiency dividend levied on government departments applies for one year only. You guessed it, the year is 2012-13. But because the cut will lower the starting point for future departmental spending it will cut forecast spending in subsequent years as well.

All up the deficit for this financial year will be $15 billion bigger than it was doing to be, and the forecast 2012-13 surplus $2 billion smaller.

The shuffling of money and modest cutbacks will probably do no harm. They might even convince the Reserve Bank its safe to cut rates next week at its final board meeting before Christmas and a two month break.

New OECD forecasts released overnight give Australia the fastest growth in the developed world in 2012: a year-on-year rate of 4 per cent, equaled only by Chile and approached only by Korea at 3.8 per cent.

Nations using the euro as currency are expected to grow by only 0.2 per cent in 2012, the United Kingdom 0.5 per cent the United States 2 per cent. Average among members of the Organisation for Economic Co-operation and Development will be just 1.6 per cent.

The organisation says vigorous investment and exports buoyed by the mining boom should offset the negative effects of a persistently strong dollar and budget cutbacks.

Should the global economy deteriorate further there is room for stimulus spending and tax cuts although these would “postpone the return to budget surplus”.

OECD forecasts are generally in line with those of Australian Treasury. The forecasts released overnight reflect those released by the Reserve Bank earlier this month and suggest only limited downward revisions to growth when the mid-year budget update is released later today.
The OECD says the euro zone appears already be in recession and the United States could fall “into a recession that monetary policy can do little to counter” if it doesn’t loosen its budget settings.

“In view of the great uncertainty policy makers now confront, they must be prepared to face the worst,” the report says. A large negative event would “most likely send the OECD area as a whole into recession with marked declines in activity in the United States and Japan, and prolong and deepen the recession in the euro area”.

He acknowledged yesterday it would be “counterproductive to take an axe to the budget in these uncertain times”. But he’ll do it anyway this week because he feels he has to in order to continue to credibly forecast a budget surplus in 2012-13.

The Commonwealth budget is massive. It amounts to one third of a trillion dollars. Whether it is in deficit or a surplus by a few billion matters not at all. Scaled down to a household’s budget it is the difference between spending or saving $1000.

But whereas it might help a household to reign in its spending (unless it was going short on food) it can hurt an economy for a government to reign in its spending when things are uncertain.

The Reserve Bank warned this month a deep recession in Europe would represent “a downside risk for the Australian economy”. Households are already shutting their wallets and businesses and holding off hiring in anticipation of such a risk... Cutting household welfare and cutting corporate welfare will unsettle them further.

Early indications point to billions of dollars of corporate welfare cuts and at least one cut to household welfare - taking away the $258 maternity immunisation allowance paid to all families of fully immunised children aged up to five.

There may well be good reasons to make such cuts in normal times. But these are anything but normal times. Prudent economic managers prune lightly or not all when things look edgy.

The Treasurer is doing it because the jibes about never delivering a surplus in four budgets have got to him. But it was right not to deliver a surplus during one of the greatest global recession on record. It is almost certainly right not to deliver one now. We better hope he cuts carefully.

The European financial crisis has ripped a further $7 billion from budget revenue increasing the pressure on Treasurer Wayne Swan to find big savings in this week’s economic statement.

Forecasts to be released with the statement show capital gains tax takings from companies, superannuation funds and individuals down $7 billion on budget forecasts for the four years ahead which were themselves down $9 billion on the forecasts in last year’s November statement.

Since the May budget the Australian share market has fallen 15 per cent.

“Every self-funded retiree and investor can see the effect on our share market,” Mr Swan said yesterday. “The heightened global volatility is making households more cautious in their spending and businesses more hesitant in their hiring decisions.”

The May budget forecast a jump in company tax revenue this year of 28.9 per cent, a jump in superannuation tax earnings of 29.3 per cent, a jump in income tax takings of 10 per cent and the creation of 200,000 extra jobs. Each of those forecasts will be sharply downgraded.

Finance minister Penny Wong said the revisions would display the “the sort of pattern we saw in the context of the global financial crisis”.

“The European circumstances have worsened,” she told Channel Ten. “Our economy is being affected, our budget is being affected. There are no easy saves left to take. You should anticipate some difficult decisions.”

The government will save around $10 billion over four years by limiting the tax deductions created by corporate mergers... It will save more cutting the tax-free treatment of so-called “living away from home” allowances paid to foreign executives. Claims for tax-free living away from home allowances have jumped from $162 million to $740 million in the past five years. A Tax Office investigation has found the most common occupations escaping tax by using the allowances are managers, directors and chief executives. More than one third claim tax-free allowances for living in Sydney.

Ms Wong said working Australians would be spared the full force of the spending cuts. “We are a Labor Government; our values underpin our economic decisions,” she said.

Mr Swan said while the measures in the statment should ensure a return to surplus in 2012-13 it would “be counterproductive to take an axe to the budget”.

“We will strike a balance between strong fiscal discipline and continuing to support job creation,” he said. “We will help underpin confidence and prosperity for the long term.”

Measures that will touch ordinary Australians include a slug of $2100 for parents who don’t give their children all of the recommended vaccinations. They will lose the three payments of three payments of $726 currently available under family tax benefit A. From July the government will abolish the $258 "maternity immunisation allowance", paid as a reward for fully immunising children. Around $200 million will be taken from the budget commitment to reward top teachers with performance pay bonuses.

Other measures include booking revenue from selling broadcast spectrum not previously included in the budget and bringing forward spending that would normally take place in 2012-13, the year of the forecast return to surplus. The government has already announced it will bring forward $1.5 billion of carbon price compensation payments. It will bring forward a further $1.4 billion in Queensland flood reconstruction spending.

The Government will introduce changes to income tax law affecting consolidated groups as part of its continued commitment to maintaining the integrity, equity and fairness of the tax system.

The changes relate to the way a consolidated group can deduct the costs allocated to some assets following a corporate acquisition.

The changes implement the recommendations of the Board of Taxation for future consolidations and seek to ensure that companies inside corporate groups don’t receive tax benefits, which corporates outside consolidated groups are unable to receive.

“The new laws will help protect potential threats to revenue by putting a limit on the scope of amendments to the consolidation regime made in 2010,” Assistant Treasurer Bill Shorten said.

“This demonstrates the Government’s commitment to maintaining the integrity, equity and fairness of the tax system.”

The changes affecting a corporate acquisition will depend on the time when the acquisition took place. This follows recommendations from the Board of Taxation’s Report on the Review of the Consolidation Rights to Future Income and Residual Tax Cost Setting Rules and extensive consultation with a working group of tax experts and key industry bodies, including the Corporate Tax Association, the Tax Institute, the Institute of Chartered Accountants in Australia and CPA Australia.

The amendments address problems in the policy proposed by the former Government in 2005 (and 2007) and enacted in 2010 that affected corporate acquisitions from 2002. The changes proposed today by the Government will depend on the time when the acquisition took place. That is, different changes are proposed for acquisitions before 12 May 2010 (when the law was passed by both Houses of Parliament), after 30 March 2011 (when the Board of Taxation was asked to review the rules) and the intervening period (the transitional period).

Corporate acquisitions that took place before 12 May 2010 will be affected by the changes subject to the application of normal amendment periods. These changes are necessary to ensure deductions are claimed only when it was intended and will protect a significant amount of revenue that would otherwise be at risk.

Changes for the period between 12 May 2010 and 30 March 2011 will largely protect taxpayers who made business decisions on the basis of the current law before the Board’s review was announced.

For acquisitions after 30 March 2011 changes will be made to increase certainty for taxpayers and apply a business acquisition approach in certain cases.

Private rulings sought and received by taxpayers from the ATO, including written advice under advance compliance agreements, will stand.

The Board recommended further investigation be undertaken on two issues: the treatment of liabilities under the consolidation regime and capping the tax costs allocated to certain types of assets. I look forward to the Board’s further advice on these issues when it reports on its post implementation review of certain aspects of the consolidation regime.

The Board of Taxation’s Report on the Review of the Consolidation Rights to Future Income and Residual Tax Cost Setting Rules is available at www.taxboard.gov.au.

In addition to the changes to the income tax law affecting consolidation that I have announced today, the Government will also make changes to the operation of the taxation of financial arrangements (TOFA) rules for consolidated groups.

These changes will ensure that, for consolidated groups, the TOFA Stages 3 & 4 provisions operate as intended and that the tax treatment of financial arrangements that are liabilities is appropriate.

The changes also address the technical issues raised by industry as part of the post-enactment consultation on the TOFA Stages 3 & 4 regime and ease the transition of consolidated groups into the regime.

The changes will apply from the start of TOFA Stages 3 & 4 regime.

Details of the changes can be found on the Treasury website (www.treasury.gov.au).

Affected taxpayers should seek expert advice. Queries can be made by emailing consolidation@treasury.gov.au.

The Government will undertake public consultation on draft legislation for these measures as a matter of priority.

Friday, November 25, 2011

The fastest growing sector of the economy is "mining related" - including construction and services provided to the mining industry, but not mining itself:

"To leave the analysis here, however, would be to tell only part of the story. There is a complementary way to look at the economy’s response to these differential growth rates across the mining and non-mining sectors, which is to look at the behaviour of the labour market and, in particular, the distribution of unemployment rates across the country.
Data on unemployment rates are available for about 1,400 statistical local areas (SLAs) which, together, span the whole of Australia. We can therefore examine how the distribution of unemployment across the country has changed over time. Chart 13 shows, for every quarter from Sep 1998 to Jun 2011, two summary measures of this distribution – the average unemployment rate, and its dispersion (the weighted standard deviation across all SLAs).

As the mining boom has progressed, the average unemployment rate has fallen, and its dispersion across the country has also fallen. While it is possible to identify individual parts of the country that have experienced higher unemployment as a consequence of the differential rates of growth of the sectors of the economy (for example, the region around Cairns), the results in Chart 13 imply that these examples are the exception, rather than the rule.

We are seeing a widening gap between the growth rates of the mining (and mining-rated) sectors and the non-farm non-mining sector. But thus far the economy has absorbed this significant structural change with average unemployment remaining quite close to its full-employment rate, and the dispersion of unemployment across the country having declined to well below its level before the boom.

That is a quite impressive achievement."

In a sense this is not surprising. As labour gets more scarce employers have to search for workers everywhere.

Australia's leading business economists expect just one more cut in interest rates, some time next year, followed by steady rates and then two hikes in 2013.

The forecasts are sharply at odds with the pricing on the futures market which has rates falling seven times by mid next year and then climbing barely at all.

Elected by their peers to the Australian Business Economists executive committee, the 15 forecasters work for big firms including the Macquarie Group, Deutsche Bank, JP Morgan and the Westpac, Commonwealth, National Australia and ANZ banks.

Presenting the median forecasts to the annual forecasting conference in Sydney Colonial First State economist Stephen Halmarick stressed the range of the forecasts was wide, something to be expected in uncertain times.

The lowest cash rate forecast was 3.75 per cent, implying three more cuts in the year ahead. The highest was 4.75 per cent, implying two more hikes.

The committee is bullish about the year ahead, expecting economic growth to accelerate from 1.4 per cent this year to 3.3 per cent in 2012 and 3.5 per cent in 2013. Both forecasts exceed those made by the Reserve Bank earlier this month...
Treasury economist David Gruen spoke of a “boom and gloom” mentality saying the benefits of the mining boom were widespread than realised. Not only was unemployment lower than it had been for years but the dispersion of unemployment rates across geographical regions was lower than it had been for years.

Reserve Bank governor Glenn Stevens told the conference inflation had good chance of being between 2 and 3 per cent throughout next year with a “slightly greater
probability” it would end up above 3 per cent in 2013.

He would prefer warning labels or estimates of probability to be attached to forecasts.

“We all want to believe that someone, somewhere, can tell us what to expect. The truth is the best we can do is speak about likelihoods,” he said.

Future Fund chief David Murray has backed Qantas in its dispute with its workforce saying unless it and companies like it tackle entrenched union privilege Australia risks the same fate as Europe. And he says the government is aping Europe by borrowing to buy votes.

“My European banking counterparts tell me they can’t cut jobs without offering three years redundancy,” he told an forecasting conference in Sydney. “We are creeping towards that in the new industrial relations framework. It gives unions a right to bargain in areas traditionally the management's prerogative.”

“Australia started out after the second world war making work arrangements a little bit more reliable, introducing the rule of law, but the process has gone too far - it gets to the point of unaffordability.”

“Qantas management have no option but to do what they are doing. They are running an unviable airline. With terrible productivity internationally they are hostage to competitors domestically.”

“The stakes are high. Qantas is not the only companies,” Mr Murray told the business economists.

Appointed chairman of the Future Fund in 2004 by Coalition Treasurer Peter Costello the former Commonwealth Bank chief steps down in April. He has already accepted a part-time role with the global investment bank Credit Suisse.

“I don’t see anything concrete on productivity,” he said. “I don’t see governments trying to wind back their debt positions rapidly, I don’t see people coming off subsidy arrangements for industry, in fact new arrangements are more the norm.”

“I would have thought what is happening in Europe would be one of the most timely wake up calls in Australia's history... Yet it is being completely ignored because we’ve had twenty years of growth. The size of complacency here is outrightly dangerous.”

“What is it that’s wrong? It is the process by which public debt is used to buy votes with the promises of entitlements. If you borrow to buy votes you are expropriating the savings of other people.”

Asked whether now was the right time to slash spending and cut back on debt Mr Murray said it was better to do it when unemployment was around 5 per cent than later when it went higher.

The carbon tax and the mining tax were also badly timed.

“Irrespective of what you believe about climate change, given what’s happening in the world the timing of the the policy response is not good at all. The timing of introduction of a mining tax when the terms of trade boom was just about to end is not good at all either.”

Mr Murray said a simpler way of redistributing mining income would have been to end the tax deductibility of royalty payments and use the proceeds to cut company tax. “It could be done in two lines of code, a few lines of legislation,” he said.

Mr Murray acknowledged that government debt was low by world standards, but he said Australia’s net foreign liabilities were high by world standards. “And its the second one that matters, because it’s all got to be repaid.”

Treasury chief economist David Gruen disagreed telling the conference later Australia had high foreign liabilities because it was investing a huge amount in order to “most likely generate future export earnings”.

“We have yet to get the output from the mining boom that we expect to see. Some of our productivity will recover naturally as those investments coming to fruition,” he said.

Thursday, November 24, 2011

Here's what I wrote last month when there was time to put things right:

"It is in all of our interests to give oppositions access to the same high quality costing process as governments. The access has to be confidential. Developing a policy is an iterative process. Ideally an opposition or a government comes up with idea, sketches it out, perhaps get surprised at how much it costs (or doesn’t cost) fine tunes it, sends it back for another costing and so on until the polciy and costing are final.

The new Parliamentary Budget Office will enable oppositions to do that. For the first time oppositions will be able to put up ideas to an official costing organisation in confidence and keep coming back until they get it right.

Except that they won’t, once the campaign starts. Unhelpfully, the provisions of the government’s bill remove confidentiality with the issue of writs. After the campaign starts (exactly the time oppositions might need to fine tune their policies) consultation becomes a one-shot game. An opposition can submit a policy to the PBO, but it won’t know what the PBO makes of it until just before the finding is published on the PBO website.

No opposition will take that risk, at least about something risky. Joe Hockey has already said he won’t use the process. Nor should he. it is loaded against the opposition.

It can easily be fixed. All that’s needed is an amendment that would allow confidential consultations during the campaign as well as during the rest of the year. It’d be in Labor’s interest as well as the Coalition’s. It’ll be in opposition soon enough. Swan, Hockey or whoever occupies the shadow treasurer’s chair could iterate with the PBO as much as they want until they get the policy right, knowing the PBO would release only the final costing and not embarrass them.

Hockey moved an amendment to that effect in the House of Representatives. It was defeated. But all is not lost. The Greens are prepared to save the day and negotiate on confidentiality in the Senate. Their only condition is that all parties putting themselves up for office be required to release official costings of all of policies worth more than $100 million, also a good idea.

There’s a chance sense will prevail. We have a rare opportunity to get things right, to set up a system that will work for both sides of politics forever. Labor shows every sign of shooting itself in the foot. I’m not confident Hockey won’t either. But we’re close, very close."

The government said "no" after circulating a minute from the Secretaries of Treasury and Finance coming up with three reasons why not.

It's below.

Reason 1 is doing so would be inconsistent with the Charter of Budget Honesty arrangements. Err.. The reason for the PBO is that the Charter of Budget honesty arrangements are not working. The whole point of having the new office is that it will do things differently. By definition it will be inconsistent.

Reason 2, about game playing, is a tenuous possibility. But there can be safeguards. It would be easy for a clever PBO to check announced policies, and if party A asked the PBO to cost announced policies from party B, the PBO could just say no, or at least "not unless party B asks me to".

Reason 3, about resourcing is something of an excuse. A temporary spike in workload would be easy to manage through secondments and hiring consultants.

Tuesday, November 22, 2011

ROD HOMEWOOD found it difficult to hold down a job when he came back from Vietnam. Over three decades the former conscript reckons he held 16 jobs.

“And then I lost it, I fell off my tree. Everything snowballed, they pulled me out of the work at age 54 and I haven’t had a job since.”

A new study - the first of its kind in Australia - finds Rod’s experience typical. Conscripts who went to Vietnam were about as likely as anyone else to be in work until the 1990s, when their likelihood of employment began to dive.

Using census data on employment status by birth date Wollongong University economist Peter Siminski finds men born on the dates that were represented by the marbles drawn out of the barrel to select conscripts far less likely to be employed all these years on than men born on other dates in the same years.

When he narrows the birth dates down to the battalions that went to Vietnam rather than served at home he finds the effect is worth 37 percentage points.

“To give you an idea of what that means, typically 72 per cent of the men born in those years were still working at the time of the census. This effect is more than half as big. The conscripts who went to Vietnam are half as likely to be still working as their peers born at around the same times.”

Dr Siminski’s study will be published the Review of Economics and Statistics early next year.

Using separate Tax Office data he finds the effect on employment is relatively recent, building since the mid 1990s...
He says the results are consistent with age exacerbating war-related conditions. But in the United States the effect is less obvious. Although he can’t be certain he says Australia’s effect could be driven by the design of our veterans' disability pension.

Unlike the US pension it ties the rate of payment to an assessment of employability. Veterans assessed as being totally and permanently incapacited get a much bigger payment than veterans assessed as being able to do more work.

“I am not saying the system is too generous,” Dr Siminski told the Herald. “The problem is it is tied to employability.”

“I actually have a lot of sympathy for these guys and everything they have gone through. It’s not the level, it’s the design. A simple solution would be to give everyone the top rate, I wouldn’t have a problem with that.”

Rod Homewood keeps himself busy volunteering at the Oakleigh State Emergency Service.

He agrees that it is worthwhile being assessed as totally and permanently incapacitated, but he says it isn’t easy. “They try not to give it to. you. It took many years until they connected my condition with service. I could show you a room of fifty veterans. Their stories might be different but the pattern is the same. They work for twenty or so years and then everything goes wrong.”

Dr Siminski has other uses in mind for the date of birth data. He wants to examine the life span of men who were Vietnam conscripts, their income, mental health and marriage status.

Friday, November 18, 2011

Treasurer Wayne Swan has recommitted himself to cut spending to return the budget to surplus as new private sector forecasts suggest the task will twice as difficult as had been believed.

Forecasts sent to clients this morning by Canberra economic modelling firm macroeconomics.com.au put this year’s budget deficit at $34 billion, rather than the $23 billion projected in the budget. The deficit in 2012-13 is $7 billion rather than the $3 billion surplus forecast on budget night.

In both years the deterioration is $11 billion rather than the $5 billion previously arrived at by private forecasters.

“Our model comes up with lower economic growth,” the firm’s director of budget and forecasting Stephen Anthony told the Herald. “This means a lower tax take from companies and workers this year and a lower starting point in future years.”

The May budget had net debt peaking at $107 billion or 7.2 per cent of gross domestic product this financial year. Macroeconomics.com.au says it is on track to keep climbing for at least the next four years, hitting $137 billion or 8.3 per cent of GDP in 2014-15.

“Wayne Swan could have prepared the way for tightening in the May budget while the outlook was still strong,” Mr Anthony said... “Regrettably he delayed, so now it appears budget cuts will be forced upon us during a downturn.”

Mr Anthony said he wanted the Treasurer to cut hard in the upcoming mid-year budget review nonetheless. “He’ll needs cuts of $7 billion to $11 billion to get back into surplus. It is important to show we are able to maintain fiscal discipline.” Mr Anthony is as former Treasury and private sector economic modeller who set up macroeconomics.com.au in 2008. His clients are mainly in the state and federal public sectors.

He said the easiest and biggest cuts could be found in middle-class welfare, adjustments to ”things such as means tests and the family tax benefits which ought to accord with Labor values”.

Mr Swan is expected to release the mid-year budget review within a fortnight.

He said yesterday it was “very clear” the economy would grow more slowly than expected and that there would be a “significant hit to revenues”.

“But I have said we remain determined to return the Budget to surplus in 2012-13. Because of what has occurred in the global economy and what has occurred in terms of Budget revenues, there will be savings,” he told ABC radio.

“We want to send a very clear message that we are committed to fiscal discipline at a time when many countries around the world are doing very badly through an absence of fiscal discipline.”

“We have made the point that when you move to stimulate the economy you have to put in place an exit strategy. We’ve done that, bringing our Budget back to surplus consistent with strong growth. The fact is we have an outlook for growth which is around trend at the moment and that’s healthy compared to just about any other developed economy in the world.”

People concerned that the cuts would be too deep should “hold fire until they see the statement”.

Mr Swan believed the parliament would pass the mining tax package at its final sitting for the year next week.

If it did not then “what’s endangered is that big boost to superannuation for millions and millions of Australian workers and of course the tax cut for small business.”

Our earnings landscape is shifting. Ten years ago the average full-time adult male worker in NSW took home more than his counterpart in Western Australia by a margin of $70 per week.

These days Western Australian men outpace NSW men by $335 per week. Western Australia eclipsed the Australian Capital Territory as the highest earning state or territory more than a year ago.

For women the margins between states are little changed, suggesting Western Australia’s earnings growth is being driven by the male-dominated mining and construction industries.

Mining workers are by far Australia’s highest paid according to the Bureau of Statistics figures with full-time men in thee industry taking home an average of $120,100 per year. Full-time women in the industry take home $91,100...
The worst-paying industries are retail sales and accommodation & food services, each paying both men and women an average of around $51,100.

The ABS figures appear to show the male-female wage gap widening to a 25 year high but Melbourne Institute labour specialist Mark Wooden believes the averages may reflect the changes in the composition of the workforce rather than changes in wages themselves.

“It employment in the low-wage jobs in the services sector was growing, and if those jobs were prominently filled by women that could push down average female wages without pushing down any actual wages,” he told the Herald.

“If employment in low-wage jobs in manufacturing was falling, and if those jobs were predominantly filled by men that could push up average male wages without pushing up actual wages,” he said.

The fastest growing average wages over the past year have been in wholesale trade (up 11.9 per cent), health care and social assistance (up 6.9 per cent), arts and recreation (up 5.5 per cent) and construction (up 5.4 per cent), and accommodation & food services (5 per cent).

Wages growth has been the weakest in administrative and support services (down 2.8 per cent), rental hiring & real estate (down 0.1 per cent).

Mining wages, previously increasing strongly, grew 4.8 per cent. Across all industries average full-time wages grew 5.1 per cent, a comfortable margin above the inflation rate of 3.5 per cent.

“These figures won’t alarm the Reserve Bank,” said Commonwealth Securities economist Savanth Sebastian. “They tend tends to overstate growth in wages, as the balance or workers shifts from full-time to part-time and shifts across industry sectors.”

Thursday, November 17, 2011

Wage growth has slowed to a crawl, confounding doomsayers who have warned of a wages breakout emanating from mining and giving the Reserve Bank more room to cut interest rates.

The September Quarter wage cost index from the Bureau of Statistics shows wages grew lowest in the mining industry, climbing only 0.5 per cent in the quarter after climbing 1.4, 1.2 and 0.9 per cent in previous quarters. The heat has come out of mining sector wages as commodity prices have begun to fall. In the past three months iron ore prices have fallen 34 per cent, coking coal prices 21 per cent and copper prices 14 per cent.

Total private sector wage growth averaged 3.7 per cent in the September quarter, barely above the 3.5 per cent rate of inflation. Public sector wages grew 3.3 per cent.

“Far from a wages breakout, workers are struggling to keep up with rises in the cost of living,” said ACTU Secretary Jeff Lawrence.

“What we are seeing is steady, solid and sustainable increases in wages. The facts are the wages share of national income is now 53.1 per cent, close to the lowest it has been for almost 50 years... while the profits share of 28.1 per cent is close to the all-time high.”

“Employer groups have been screaming that a wages breakout was imminent since this time last year, but there is no evidence it has occurred.”

An Australian Institute of Company Directors survey released this week forecast wage growth of 4.2 per cent. One in five of those surveyed expected wages to climb 5 per cent.

Over the past quarter wage costs grew fastest in the accommodation and food services industry and lowest in mining. Over the past year wage costs grew fastest in the wholesale and mining industries and lowest in public administration.

At 0.7 per cent total growth in the September quarter was the lowest in almost two years. Total annual growth slipped from 3.8 to 3.6 per cent.

‘‘The tame reading keeps the door open to another rate cut,’’ said Commonwealth Securities economist Craig James. “It’s a Goldilocks situation – wages are not too hot, not too cold. But they are still rising faster pace than underlying inflation meaning they can support spending. The combination of continued economic growth and a flattening of the job market means productivity may be picking up.”

We’ve more and more bedrooms, but they are more and more empty. The latest biennial Bureau of Statistics housing survey finds us with more empty bedrooms than ever before and also less likely than ever to own our homes outright.

Traditionally one of the world’s highest, Australia’s rate of outright home ownership has slipped from 42 per cent to 33 per cent in the past fifteen years. At the same time the proportion of households attempting to buy with a mortgage has climbed from 30 to 36 per cent and the proportion renting privately has climbed from 18 to 24 per cent.

The changes follow new tax rules that made negative gearing more attractive from late 1999 increasing the number of landlords and pushing house prices beyond the reach of many would-be home buyers. The ABS says the average first home buyer loan climbed from around $160,000 to to near $280,000 between 2001 and 2011.

The Bureau says the slide in outright home ownership may also reflect the increasing use of redraw facilities which allow mortgagees to top up rather than pay off their mortgage.

There’s certainly more room per person. Over the past fifteen years the number of people living in private houses has climbed 23 per cent. The number of houses has climbed 28 per cent. The average household size has slid from 2.7 to 2.6 people but the average number of bedrooms has climbed from 2.9 to 3.1.

The Bureau says this means by international standards more than three quarters of Australian households now have one or more spare bedrooms... Among the predominantly empty-nesters who’ve paid off their mortgage the figure approaches 90 per cent.

Only 3 per cent of households don’t have enough bedrooms.

Mortgages have the highest housing costs averaging $408 per week when the mortgage, water charges and rates are taken into account. Private renters pay on average $305 per week, public renters pay $119 per week, and outright owners just $35 per week.

But private renters pay the highest proportion of their income in housing costs, an average of 20 per cent, and have suffered the worst increases. Renters costs have climbed 45 per cent after adjustment for inflation over the past 15 years. Mortgagees costs have climbed 42 per cent.

"Households on a single wage would struggle to pay $460 a week which is the new median cost of first home buyers,” said Sarah Toohey, campaign manager for Australians for Affordable Housing. “They are having to question other financial decisions such as whether to have children and they are increasingly vulnerable to life changes like illness or retrenchment".

"There is a mostly unknown, subterranean battle of wills that takes place every day between high-profile economists who are paid to divine our future, often many months, or years, in advance, and “traders”, that is, financial market investors, who are reluctantly influenced by their analytical brethren.

I have lots of friends who fall into both camps. If there is one constant amongst traders, it is that they universally hate economists. The typical refrain is that economists (strategists and analysts too) are overpaid astrologists who could not hit a dart-board if it was pinned to their faces.

Economists, frankly, do not have much of a comeback to this criticism, since empirically they know, with some unstated sorrow, that their forecasting records over the long-run are, in truth, no better than the proverbial monkey pegging darts at a target.

Whenever I hear a trader lambast an economist, or the analyst fraternity at large, it has always irritated me, for reasons that I have not previously articulated. It was one of those subliminal push-backs that I get when a part of my brain knows something to be right or wrong, but has yet to thread the thoughts together as to why exactly, and comprehensibly, this might be the case.

These two cohorts do make for fascinating contrasts. As a group, economists and strategists tend to be detail-oriented, thorough, cerebral, well-behaved, and lucid, if not eloquent. Of course, you have some unavoidable genetic dispersion in terms of actual aptitude. Some are especially proficient at making a lot of noise and grabbing attention, but sadly fall short in the underlying horsepower stakes. Others have unusually impressive bandwidth, and would likely be successful at most things they turned their minds to.

The rarest breed of them all is the economist who would make, or has made, an outstanding trader. This is generally someone imbued with an unusual conjunction of qualities: bona fide intellect; the ability to quickly synthesise meaning from disparate information; and, most crucially, the capacity to make rapid, probability-weighted decisions. That is, someone with well-informed conviction. Oh and throw brass balls into the mix. You need to be able to accept and assume 'risk'.

What about traders? Well, pure traders, as opposed to traditional 'investors', are either gamblers or bookmakers..."

Wednesday, November 16, 2011

Whatever happens in Europe we can take comfort from the knowledge that our money is being handled by professionals - experts who’ll know what to do.

They do, don’t they? It’s about to become more important.

Wilful blindness by the government and spinelessness by the opposition have ensured the amount of compulsory super we are forced to hand over to money managers will climb from 9 per cent to 12 per cent of our salaries by the end of the decade (unless we run self-managed funds and try to make a go of financial markets ourselves, something that won’t happen on a large scale and would unmanageable if it did).

Many of us will have to take out larger mortgages than we would have and hold them for longer in order to feed the money management machine. We won’t have the income we would have to pay them off.

Henry recommended against it. He didn’t buy the fiction that the extra super contributions would come from employers (who would presumably get them from thin air). Neither does anyone else, when pressed. The money will come out of future wage increases, giving us less control of what should be our own money.

And giving fund managers more. Even if we have to borrow to give it to them. The Coalition opposed the move for the right reasons - it is financially reckless, costing the budget more in tax concessions than it will raise from the mining tax intended to funded it, it eats into the income of hard-pressed Australians at the times when they need it, and it is paternalistic on a scale that makes mandatory precommitment for poker machines look inoffensive.

And then the Coalition backed down. It’ll tear apart the carbon tax but according to Abbott “national savings and retirement incomes are a significant issue particularly with an ageing population and that’s why the Coalition has decided that we won’t rescind the legislation should it go through the parliament”.

Which pushes us into the hands of fund managers, and in many cases the union-dominated boards who appoint them. They might just be worth their fees if they could get us a better return than we could get ourselves paying off our homes.

The latest Superratings table shows they can’t, over a sustained period of time...

For the past five years the median “balanced” fund has returned an average of just 0.92 per cent per year. Over each of the past ten years the return has averaged 5.16 per cent. Since compulsory super began back in 1992 the return has averaged 6 per cent. The first is way below below inflation, the other two don’t match the return from paying down a mortgage.

Rewarded with generous fees and a leglislatively-directed (increasing) flow of our money into their hands regardless of performance it would be reasonable to imagine fund managers had something special.

Kahneman won the 2002 economics Nobel for groundbreaking research into the way we make decisions. He saves a special place in his new book Thinking, Fast and Slow for “stock pickers”, who he says attempt to make much of their money buying and selling from each other.

“Most of the buyers and sellers know that they have the same information; they exchange the stocks primarily because they have different opinions. The buyers think the price is too low and likely to rise, while the sellers think the price is high and likely to drop. The puzzle is why buyers and sellers alike think that the current price is wrong. What makes them believe they know more about what the price should be than the market does? For most of them, that belief is an illusion.”

University of California Berkeley professor Terry Odean examined the trading records of 10,000 private investors over a seven-year period, sifting data on more than 160,000 transactions.

On average the shares the private traders sold did better than those they bought by a very wide margin of 3.2 percentage points, an “achievement a dart-throwing chimp could not match”. Private traders feel compelled to lock in gains by selling good stocks and don’t like taking losses by selling bad ones. Men are worse than women because they act “on their useless ideas significantly more often”.

The winners, on the other side of trades, are fund managers who are less likely to make those mistakes because they are less emotionally committed. But that doesn’t mean they are especially skilled.

As Kahneman says: “The diagnostic for the existence of any skill is the consistency of individual differences in achievement. The logic is simple: if individual differences in any one year are due entirely to luck, the ranking of investors and funds will vary erratically and the year-to-year correlation will be zero. Where there is skill the rankings will be more stable. The persistence of individual differences is the measure by which we confirm the existence of skill among golfers, car salespeople, orthodontists, or speedy toll collectors.”

Study after study over 50 years - including those done by Kahneman himself - has failed to find any significant year-to-year correlation in the perfomance of US fund managers. Some do well for a while, some do badly - but no more so than would be expected by chance. In Kahneman’s words, “for a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker. Typically at least two out of every three funds underperform the overall market in any given year. The year-to-year correlation is very small, barely higher than zero. The successful funds in any given year are mostly lucky; they have a good roll of the dice.”

Fund managers don’t see themselves that way. Like most of us, they think we’re better than average. “The subjective experience of traders is that they are making sensible educated guesses in a situation of great uncertainty,” Kahneman writes.

But if the way markets work mean their guesses are no better than blind guesses I don’t feel particularly good about entrusting my financial future to them. I certainly don’t feel good about being forced to entrust them with more.

The Reserve Bank believes it has room for at most one more rate cut, not the four being priced in by financial markets. And it isn’t at all certain spending cuts of the kind expected in the upcoming mid-year budget review will enable it to cut further.

The Bank’s Melbourne Cup day board minutes released yesterday reveal it was lower inflation rather than budget settings or concern about Europe that persuaded it to cut its cash rate from 4.75 to 4.5 per cent.

It believes 4.5 per cent brings the overall mix of Australian interest rates close to the average for the past fifteen years, a period when average inflation was near the centre of its target band as it is now.

Any more than one further cut would bring the mix of interest rates below their long-term average, something that would be hard to justify unless inflation fell away further.

Cuts in the mid-year budget review could only force the Bank’s hand if they further depressed inflation, something that is far from guaranteed. The expected cuts amount to $5 billion, big by budgetary standards but worth only 0.4 per cent of gross domestic product - not necessarily enough to dent consumer and business spending and weaken inflation...
Finance Minister Penny Wong yesterday talked up the expected cuts saying returning the budget to surplus on schedule in 2012-13 would give the Bank room to further cut interest rates.

"We've seen a weakening of the world economy. That's going to impact on our economy and our budget. That means some difficult decisions in the upcoming mid-year outlook," Senator Wong told ABC radio.

"The government is focused on fiscal discipline - we know that gives the Reserve Bank more room to cut interest rates as they did last week."

She told an Institute of Public Administration forum in Canberra the spending cuts would be important in demonstrating to the community and to markets there was a clear path to return the budget to surplus.

“It is a discipline to which we are holding, notwithstanding the task is more difficult given the obvious consequences of a weaker global outlook, a softer domestic economy as well as the persistent legacy effects of the global financial crisis on revenues,” she said.

The cuts would demonstrate Labor understood “the importance of social services and a strong safety net” - programs that could only be delivered if they were sustainable.

Health care costs were set to triple by the middle of the century.

“To be able to deliver a high level of care – even with increased funding – we will need to maximise the effectiveness of expenditure. This is not just a matter of cost cutting; it requires new policies and programs that will deliver high quality care,” Ms Wong said.

Westpac economists said yesterday the cuts would most likely have to come from spending on health, social security, education and defence, which between them amounted to two thirds of government spending. Another option was increased taxes.

Over the last 16 budgets from 1996 only four had delivered net savings, the first two budgets of the Howard government and the first of the Rudd government and the first of the Gillard government. Only one - John Howard’s first budget delivered savings in excess of 0.3 per cent of GDP.

Tuesday, November 15, 2011

Living costs are no longer soaring beyond control. The latest personal indexes from the Bureau of Statistics show the cost increases faced by wage earners, pensioners and welfare recipients have all dropped back from 0.9 per cent in the June quarter to a more modest 0.6 per cent in the September quarter, the same as the official rate of inflation.

The difference means that rather than climbing at an annualised pace of 3.6 per cent, living costs are climbing at an annualised 2.4 per cent, the lowest pace since the financial crisis in 2009.

Self-funded retirees are the only identified exception. Their living costs climbed 0.8 per cent in the quarter, an annualised pace of 3.2 per cent, reflecting in particular seasonal increases in the cost of international holiday travel and accommodation to which they are more exposed than other groups.

The results cast doubt on those of private surveys that have pointed to crushing living costs and create space for the Reserve Bank to cut interest rates again without stoking inflation.

The cost of food fell in the September quarter led down by substantial slides in the prices of fruit, vegetables and meat. In the past year the price of milk has fallen 10 per cent. Age pensioners are highly sensitive to such changes spending $21 out of every $100 on food.

Less welcome was 7.8 per cent increase in the price of electricity in the quarter, but it was an annual increase much more modest than the 12.8 per cent the year before...
The lower measures of living costs reflect updated estimates of what households actually spend money on introduced in the September quarter. The Reserve Bank believes the previous estimates, which were six years out of date when updated, overstated inflation by 0.25 percentage points.

The Bank expects the carbon price to add 0.75 points to inflation in the year after its introduced in July 2012 and nothing in the year that follows. Its forecasts have inflation excluding the carbon price remaining at 2.5 per cent for the next two years.

Other figures released yesterday show the price of petrol fell 2.5 cents per litre in the past week to 141.6 cents – a ten-week low.

The average credit card limit grew by just 1.5 per cent in the year to September, the slowest pace on record. The number of credit card accounts fell 15,000 in September, the first September slide in records going back 17 years.

Friday, November 11, 2011

We are less likely to die than ever before, but being indigenous, single or divorced or living outside living outside a city increases the risk.

The latest life tables from the Bureau of Statistics show an Australian girl born today can expect to live until 84, and to 84.3 if she survives her relatively dangerous first year. An indigenous Australian girl can expect ten years less. A boy born today can expect 79 years; an indigenous boy eleven years less.

In the past 20 years the average annual death rate has slipped from 8.6 per one thousand Australians to 5.7

The infant death rate has slid from 8.2 per one thousand live births to 4.1.

The least likely to die men live in Melbourne and on the Gold Coast. Both can expect 80.7 years. The least likely to die women live on Queensland’s Gold and Sunshine coasts. Both can expect just over 85 years.

The first-ever such analysis by the Bureau of Statistics finds cities far safer to live in than regional areas and a lot safer than in the bush with an average annual death rate of around 6 per one thousand compared to 8 in very remote locations.

Marriage seems to be a big help with married and widowed and divorced men and women far less likely to die at any age than men and women who have never been married...
The ABS report says married people "are less likely to participate in risky behaviour and more likely to nurture each other's health through promoting good diet and physical care", although it says it can't rule out the other possibility that healthy people are more likely to marry.

Australians born outside of the country have higher life expectancy in any given year than those within it, the highest being those born in Vietnam, who average only 2.8 chances in 1000 of dying at any age.

Although the ABS tables say a typical boy born today can expect 79 years, one of the highest life expectancies in the world, Australians already at that age needn't despair. The bureau says if you have reached 79 you can expect a further nine years. If you reach 100 you can expect a further two and a half.